In the Mortgage Rule Review, the regulator is also proposing to retire two pieces of non-Handbook Guidance, which it believes have fulfilled their purpose.
It wants to make it easier for people to speak to their mortgage provider about their options without having to go through the advice process if not needed, and reduce the different sources firms have to check to understand regulatory requirements.
The FCA will measure the success of this by looking at changes in the use of execution-only channels, the changing profile of mortgage terms going beyond state pension age and how many mortgages use a modified affordability assessment. It will also assess the stock and maturity profile of pre-2014 interest-only mortgages, such as loans past maturity, time to redemption and repossessions.
Emad Aladhal, director of retail banking at the FCA, said: “Our strategy aims to deepen trust and rebalance risk to support growth and improve lives.
“That’s why, with the Consumer Duty now in place to maintain high standards, we want to make it easier, faster and cheaper for borrowers to access and make changes to their mortgage.”
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Broadening access to execution-only sales
The FCA said the 2014 Mortgage Market Review introduced a prohibition of execution-only sales where there is “interactive dialogue”, meaning a firm must give a customer regulated advice if interacting with them about a mortgage sale or contract change, with limited exceptions.
This was to remove the risk of customers misunderstanding if they had received mortgage advice and increase the take-up of advice. The FCA said since 2015, 97% of mortgage sales had been advised.
The FCA said its Mortgages Market Study in 2019 found it was limiting competition and access to execution-only more than it intended, as well as restricting innovation such as digital channels.
It also found that customers found it hard to use the execution-only channels and were being diverted to the advice route.
To change this, the FCA is proposing to remove the interaction trigger at MCOB 4.8A7R (3), and associated Rules and Guidance to allow firms to interact with customers before a sale or contract variation. This will also apply to home purchase plans.
The regulator wants to remove the requirement for customers to positively elect to proceed with an execution-only sale where there is interactive dialogue with the firm, and maintain the requirement for customers to go forward with execution-only if they have rejected advice.
“An amended requirement for customers to positively choose to continue for all execution-only sales would widen the scope of the current requirement, introducing new, disproportionate prescription and new operational costs,” the FCA said.
It suggested introducing a rule to require firms to consider if processes are appropriate to identify execution-only customers for whom advice or other support might be necessary to avoid foreseeable harm.
The FCA will not amend its rules requiring advice in circumstances that may pose a higher risk to customers, such as taking a loan for debt consolidation, when exercising a statutory ‘right to buy’ a home, shared equity arrangements or for lifetime mortgages.
Reducing mortgage terms without a full affordability assessment
The FCA is proposing to remove the requirement for a full affordability assessment when customers want to reduce their mortgage term.
It said firms would be able to determine what form of assessment was suited to a customer’s needs instead, and this was still to be considered in line with Consumer Duty.
The regulator said some customers may find they are unable to keep up with repayments after reducing the mortgage term and there might be a risk in extending or reverting to their original term. It said an affordability assessment may not be needed if this does not extend into retirement and there are no other changes to the terms of the mortgage, but if the extension does go into retirement, an assessment will be needed.
Changes to affordability assessments when remortgaging
The FCA said some barriers and costs made remortgaging less attractive than a product transfer, even if cheaper products were available. It added that where consumers are disincentivised from shopping around, they might end up paying more than is necessary for their mortgage, noting that actions around digitising the home buying process could open up ways to streamline affordability assessments where a customer is remortgaging to a cheaper deal on similar terms.
It is proposing to amend the Modified Affordability Assessment it introduced in 2019, to allow lenders to enter a new mortgage contract where it is either more affordable than the customer’s existing mortgage or is a new product that is available through their current lender.
The FCA said this would be optional for lenders and depend on their risk appetite, but said it felt widening the scope of when a lender could use the Modified Affordability Assessment “could increase the commerciality of this option and the number of customers who could get a better deal by changing lenders”.
Scrapping existing mortgage guidance
The FCA suggested retiring non-Handbook Guidance FG13/7, which explains how firms can deal with customers fairly when they risk being unable to repay an interest-only loan.
It said while interest-only borrowers were repaying their loans faster than expected, there were still challenges for some people.
The FCA said the guidance had fulfilled its purpose by improving risk management and customer communications, which had led to an acceleration in repaid interest-only loans.
Firms will be expected to meet the requirements of Consumer Duty and existing rules under mortgage conduct of business regulation (MCOB). To avoid a “potential and unintended gap” in requirements, the FCA has proposed introducing a rule and guidance to make it clear that firms must deal fairly with customers whose mortgage terms have expired and not take repossession action unless other attempts at resolution have failed.
It also wants to retire FG24/2 guidance for firms offering forbearance to existing customers facing higher costs because of interest rates or the cost of living.
It said the guidance was a repeat of its Handbook requirements and did not offer additional protection to customers. It said it could also be confusing and inefficient for compliance.
